BlueScope steels itself for more uncertainty

BlueScope shares plunged on the back of an uncertain outlook statement, but its underlying profit of $30 million suggests its restructure is bearing fruit.

BlueScope Steel shares, which have been surging over the past year, got smashed today despite a near-$1 billion turnaround in the group’s earnings. The market appears to have concluded that might be as good as it gets for a while.

The shares fell more than 15 per cent in response to the result, which was an $84 million loss, or an underlying profit of $30 million, compared with the loss of just over $1 billion a year ago. Last year the group’s said its underlying loss was $237.5 million.

The market response was presumably mainly related to the group’s outlook statement. It said that while it expected to deliver a profit in the first half of this financial year, uncertainty in domestic Australian demand meant it didn’t expect a first half outcome better than the second half of the year just ended, where it generated an underlying profit of about $20 million.

Given the softness of the Australian economy and the query over its direction, the directors’ caution might be understandable. However, it would appear that the market expected the hockey stick-like rebound in BlueScope’s performance from its near-death experience in the aftermath of the financial crisis would continue.

Despite the market’s disappointment, it has to be said that clawing its back towards positive territory has been a remarkable achievement from the group, which has had to completely re-make itself since the crisis.

The restructuring included a withdrawal from export markets and the sale of its ASEAN and North American coated products business into a $1.4 billion joint venture with Nippon Steel, as well as a massive and traumatic cost-reduction program.

BlueScope has come through that program modestly profitable and having, with the help of an emergency equity raising and the $US540 million of cash released by the joint venture with Nippon Steel, reduced its net debt from a peak of about $1.6 billion to $148 million.

There was a modest but positive indicator in today’s results that BlueScope itself believes the restructuring phase is almost over. It announced the $87.5 million of two steel businesses from Hills Industries. The sale of a steel tube and pipe business and a steel roofing and flooring business, incidentally, virtually completes Ted Pretty’s repositioning of Hills.

Assuming the deals get past the Australian Competition and Consumer Commission, they are a signal that BlueScope’s board and management are now looking for ways to begin growing the group again. Now that the joint venture with Nippon Steel been bedded down, BlueScope’s debt is under control and the core continuing divisions within the group are operating in positive territory.

The cautious outlook statement, however, reflects the continuing reality that the fortunes of the group are still heavily reliant on levels of activity within Australia, on the value of the Australian dollar, on raw material costs and, given that it still has significant operations in Asia and North American, conditions in those markets.

The combination of the board’s wariness about the outlook and preparedness to spend to acquire new businesses while the group is still only barely profitable and not paying dividends probably explains the severity of the sharemarket’s response to the result.

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